Loan Modification Programs Fail to Achieve Goals

It’s been almost two years since the Obama administration launched the Home Affordable Mortgage Program, a program with great intentions and a lot of funds behind it. But the statistics show that the program has only helped one tenth of those who need loan modifications the most–the underwater home owners who owe more on their homes than their current value.

The $75 billion program has helped over 400,000 homeowners to date, which sounds like a good number. But with the 4 million home loans that the administration had hoped to help one has to wonder what will become of those homeowners. While foreclosure rates have dropped in some places, like San Diego county, the underwater loans will not just be passed over.

The newest information coming across the wires is that lenders are realizing that sitting around and waiting to foreclose on properties is not helping them at all (you think?), with some economists predicting that this will cause foreclosures to occur much sooner than what we have been used to. That leads to more inventory, fewer vacant homes, and less time for foreclosed homeowners to research any options and find alternate places to live. It also can lead to price reductions in local markets, which is what many people fear.

The housing market is intricately connected to the job and financial markets. In order to prevent worse problems in the future we need to find ways to help the underwater borrowers now. Although recent news has indicated that many troubled home owners are no longer actively seeking modification assistance, or drop out early on in the process, we need to come up with ways to help them. The consequence of doing nothing will effect all of us and the economy as a whole.

Many borrowers who were excited with the idea of obtaining a loan modification, being able to stay in their homes and  not facing the foreclosure gamut, gave up on the idea after finding that the loan modification process took too long and was fraught with challenges. According to the San Diego Union Tribune twice as many homes went into default this year as have received permanent loan modifications through the HAMP program.

Those who have entered the trial modification program (which is required before a permanent modification is granted) has declined 63%. The main reason is that the program takes too long, is frustrating and those who apply often have to resend the same information over and over, with no response or denial of receipt from the lenders. Simply put, people get tired of the waiting game. Some even go so far as to insinuate that the lenders intentionally keep applicants waiting so they can collect some money and keep the house occupied and in good condition before filing a foreclosure date. I’m not going to take a position on that one but let’s just say there are a lot of interesting circumstances, requirements and questions surrounding these programs for which  I cannot find answers nor make sense of.

While it seems like modifications are in the best interest of all involved, including the lender, the fact is that they are very hard to process. Paperwork must be scrutinized and filled out properly (which often is not the case)…causing information to become outdated and creating the need for the process to be started over. There are simply not enough people  to handle the influx of requests. Everyone is frustrated. Much like the city that never contemplated the number of homes to be built before building schools and highways (hey, that happened in my town!), the pre-foreclosure traffic in lender land is becoming unbearable.

I don’t have a magic solution that will resolve the crisis we are facing, but the lenders and our government need to get together and figure this out. Hiring an attorney to battle modification hurdles has proven successful for some, but most people in this situation cannot afford legal assistance. Maybe the government can create a legal aid program to help people get through the loan modification program. (I hope you laughed…that was intended to be funny).

Hopefully some new plans will come along to help those in need and prevent another foreclosure blowout. This is not a real estate centric problem, and we need to fix it in order to stimulate spending, consumer attitudes and the healing of our economy.